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If you’ve read my blog for some time now you know that I’m a capitalist at heart but the sub-prime fiasco is bringing back memories of my young high school days in which a group of friends debated the pros and cons of capitalism, socialism, communism. I always liked to play devils advocate so I usually debated in favor of socialist or communist forms of governments citing various examples and when it came to criticizing capitalism, I could only find one great argument against it.
I came to term this argument, “The Fundamental Flaw of Capitalism”

My argument was based on a simple premise. Capitalism constantly requires a constant stream of consumption in order for the system to sustain itself. In a communist form of government production is centrally controlled and equally distributed, in theory anyway. In a socialist society, all resources are controlled by the public and distributed accordingly based on need. In either communism or socialism, the production and distribution is limited to what is needed or what is available.

In capitalism, property and production is privately owned for the sole purpose of profit. Those that utilize their property and production in the most efficient and effective manner are rewarded with the greatest profit, in theory anyway. As stated earlier, in order for this system to work, there must be a symbiotic relationship between the producer and the consumer. The producer produces and the consumer consumes. In the event of a failure of the producer, the consumer is unable to sustain himself. The problem also exists if the consumer fails to consume and the producer is left with unsold inventory.

Although everyone in our little debates always agreed this was a valid “flaw” of capitalism, it was always countered with the arguement that consumption would never stop or slow down, with the the implication that it would never slow down enough to cause problems to the capitalist system.

As I read about the credit crunch, I wonder if we are approached the point of the failed consumer. Make no mistake, I know people want a great many things and people could easily consume 20 different iPods if offered the opportunity, but the means by which the consumer has been sustaining his/her consumption (credit cards, home equity, auto loans, carry trades, student loans) might now becoming all undone. Only time will tell.

This nostalgic trip makes me wonder what happened to my high school buddies. They all went off to prestigious schools: MIT, Harvard, Duke, UT, Princeton, but I lost track of most of them over the years.